In addition to cost of production, using fundamental analysis can also help you decide whether futures prices are relatively favorable or not. Fundamental analysis relies on commodity supply and demand data to make price projections. These price projections can be compared to futures prices to see if the market may be relatively over- or under-priced. This chapter discusses some of the basic fundamental analysis techniques which can be utilized in forecasting grain prices.


A. Grain Supply and Demand Tables

One of the most valuable tools for fundamental analysis of grain markets is the supply and demand table. The supply and demand table for a commodity, like corn, indicates how much supply of the commodity there is for a marketing year and how much will be used for a marketing year. For corn and soybeans, the marketing year begins on September 1 and ends the following August 31. The marketing year for wheat is June 1 and ends May 31.

On the supply side, there are three components. The first is the level of beginning stocks. These stocks represent carryover supplies from the previous year and can be used in the current year. Beginning stocks vary significantly from year-to-year and play an important role on prices. The second and usually largest component of supply is production. This also varies depending on how much acreage is planted for the commodity and how high the yield is, depending mostly on weather conditions in the summer. The third and final component for supply is imports, although this component is very inconsequential for most of the U.S. grain crops.

For the demand side, the use of a commodity varies. For corn, the major demand components are domestic feed (60%), exports (20%) and industrial use (20%). Wheat and soybeans have similar use categories although the relative importance of each varies.

The residual between total supply and total use for a given marketing year is ending stocks. This number is often reported as a percent of total use to show how scarce or abundant stock levels are for a given year. Below is a table illustrating the supply and demand for corn in the last three marketing years. The first half of the table shows the supply side elements while the last half reports the demand. At the bottom are the ending stocks which are carried forward to the following marketing year.

U.S. Corn Supply and Demand.
	1995-96	1996-97	1997-98*
Planted Acres (million)	71.2	79.5	80.2
Harvested Acres (million)	65.0	73.1	73.7
Yield (bu./acre)	113.5	127.1	127.0
Production (million bushels)	7,374	9,293	9,366
Beginning Stocks (million bushels)	1,558	426	884
Imports (million bushels)	16	13	10
Total Supply (million bushels)	8,948	9,732	10,259
Feed Use (million bushels)	4,711	5,368	5,700
Industrial Use (million bushels)	1,588	1,690	1,825
Exports (million bushels)	2,228	1,790	1,475
Total Use (million bushels)	8,522	8,848	9,000
Ending Stocks (million bushels)	426	884	1,259
Stocks-to-Use (%)	5.0%	10.0%	14.0%

* Estimate by USDA on May 12, 1998

USDA provides estimates of the supply and demand table on a monthly basis in the World Agricultural Supply and Demand (WASDE) Report. This report, which is usually issued mid-month, gives supply and demand estimates for most major U.S. field crops as well conditions in foreign countries. It is probably the most widely anticipated report by grain traders and will play a large role in establishing futures prices for most crops.

For a given marketing year, the USDA will begin to release supply and demand estimates in May, prior to the start of the marketing year. For example, the first report for the 1998-99 marketing year, which begins September 1, 1998, will be released in the May 1998 WASDE report. It is important to recognize that these numbers are simply estimates and may change substantially throughout the year as new information becomes available. In fact, many private commodity analysts will issue their own reports which can differ from the USDA numbers.

In May when the first supply and demand estimates are released, the U.S. corn crop will be nearly planted but a great deal of uncertainty still exists about potential production because of summer weather. As weather conditions unfold through the summer, the USDA will revise their production estimates accordingly and usually by December or January will reach a final estimate for production, once the crop is completely harvested. For the remainder of the marketing year, the demand side numbers may change as export trade and livestock conditions change, which influence the level of ending stocks for the marketing year. The ending stocks for the marketing year is the most important statistic for establishing price in the futures market. If ending stocks are projected to be tight then prices will increase to ration demand for the rest of the year. Conversely, large ending stocks will lead to lower prices to encourage corn demand.

While the WASDE report is an important source of information on a monthly basis, there are other reports issued every week which are used to gauge supply and demand. For weekly production information, the USDA Crop Progress Report provides information on the planting progress, crop development, crop condition, and harvesting progress. This report, which is usually issued on a Monday during the crop growing season, can provide early warning signs regarding poor or good growing conditions which will impact U.S. production.

For demand, the only major category that is reported on a weekly basis is exports. On Monday, the USDA reports the Export Inspections, which signify the total amount of corn shipped from U.S. ports to foreign countries. This report can be useful to assess how strong or weak exports are in comparison to USDA export projections from the WASDE report. By taking the total exports projected for the marketing year from the WASDE report, you can use the weekly export projections to see if actual exports are ahead of pace or behind pace in comparison to USDA?s estimate.


B. Fundamental Analysis of Grain Prices

The goal of fundamental analysis is to turn basic supply and demand data, like that discussed above, into accurate price projections. In this section, we show how to use USDA supply and demand data to develop simple but reliable forecasts for corn prices.

As discussed above, probably the most crucial statistic for corn supply and demand is the level of ending stocks. This number, when expressed as a percent of total use (the stocks-to-use ratio), signifies how scare or abundant stocks are and signals the market to either raise prices to ration demand or lower prices to stimulate demand. For grain products, there tends to be a strong relationship between the SU ratio and the futures price of the commodity.

For example, suppose you wanted to predict the May 1998 futures price for corn. This contract is for corn in the 1997-98 marketing year. If USDA is projecting ending stocks to be relatively low for that marketing year than the May futures price should be relatively high and vice versa. Using historical data, you can determine the relationship between the May futures price and USDA's estimate of the SU ratio in May. For the years 1990 through 1997, the ¨'s signify what the SU ratio has been in May (the x-axis) and what the corresponding May futures price has been (the y-axis).

Fitting a trend line through the original data provides a best guess of what the futures price would be based on the SU ratio. For example, if the USDA estimated in January that the SU ratio was 10% for the 1998-99 marketing year, then we would expect the May futures prices to be around 300 if the SU ratio did not change between January and May. If the May futures price is significantly below the fundamental level, this may be a good indication to buy and if it is significantly above the fundamental price level, this may be a good indication to sell.


May Corn Futures Price and SU Ratio in May